LU5 Measuring the performance of the economy Chpter 13

Chapter 13: Measuring the Performance of the Economy

Overview

• This chapter focuses on how to measure the economic performance through various macroeconomic indicators and objectives relevant to the South African context.

Learner Outcomes

• Explain the five main macroeconomic objectives.

• Define Gross Domestic Product (GDP).

• Differentiate between nominal GDP and other national accounting concepts.

• Measure employment and unemployment rates.

• Measure the Consumer Price Index (CPI).

• Understand South Africa's balance of payments.

• Explain measures of income inequality in South Africa.

Key Definitions and Concepts

Macroeconomic Objectives

1. Economic Growth

   • Increase in capacity to produce goods/services over time.

   • Visualized by an outward shift of the Production Possibilities Curve (PPC).

   • Essential for improving living standards and employment opportunities.

2. Full Employment

   • Full use of all factors of production, especially labor.

   • Unemployment is defined as individuals actively seeking work but unable to find it.

   • Low unemployment is a policy objective.

3. Price Stability

   • Keeping inflation rates low is essential.

   • High inflation indicates economic inefficiency and instability.

   • Inflation signifies a continuous rise in prices.

4. Balance of Payments (BOP) Stability

   • Record of a country's economic transactions with the rest of the world.

   • Important for understanding the national economic health and influence of foreign trade.

5. Equitable Distribution of Income

   • Fair distribution of income across society.

   • South Africa faces significant income inequality, with a wide gap between rich and poor.

Measuring Economic Activity

• Economic activity is primarily measured through GDP, which represents the total value of goods/services produced over a specific period (usually annually).

  • Nominal GDP vs. Real GDP

    • Nominal GDP: Calculated using current prices.

    • Real GDP: Adjusted for inflation using prices from a base year.

Methods of Calculating GDP

1. Production Method (Value Added)

   • Calculates GDP based on each stage of production's value addition.

   • Prevents double counting by focusing on final goods.

2. Expenditure Method

   • Counts the total spent on final goods/services.

   • Formula: GDP = C (Consumption) + I (Investment) + G (Government Spending) + (X - Z) (Net Exports).

3. Income Method

   • Adds all incomes earned by factors of production (wages, rents, interest, profits).

   • This method reflects the income generated within the economy during production.

Consumer Price Index (CPI)

• Measures changes in price levels of a basket of consumer goods and services.

• Important for tracking inflation and understanding purchasing power changes in households.

• Formula: CPI = (Cost of basket in current year / Cost of basket in base year) x 100.

Balance of Payments

• Summarizes the transactions of a country with the rest of the world, including current and financial accounts.

  • Current Account: Records exports and imports of goods/services and primary income.

  • Financial Account: Records transactions in assets and liabilities.

  • A balanced BOP is crucial for economic stability.

Measuring Inequality

1. Lorenz Curve

   • Graphical representation of income distribution within a population.

   • Shows the proportion of total income earned by various segments of the population.

2. Gini Coefficient

   • A statistical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality).

   • Gini index is the Gini coefficient multiplied by 100.

3. Quantile Ratio

   • Compares the income of the top percentage of earners to that of the bottom percentage.

   • Higher ratios indicate greater levels of inequality.

Important Notes on GDP Measurement

• GDP can be expressed at market prices, basic prices, or factor cost. Each has a specific method of calculation and reflects different aspects of the economy's performance.

  • Market prices include taxes and subsidies, basic prices exclude them, while factor cost focuses on the expenses incurred in production without taxes.

Conclusion

• Understanding these concepts is crucial for evaluating economic performance and the overall health of the South African economy, which can inform policy decisions and economic strategies.